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Emerging market corporate credit comes of age
by Dylan Lobo on Dec 28, 2012 at 07:00
Not so long ago, if you had described emerging market (EM) corporate debt as the next big thing, you would have been dubbed a fantasist with little investment knowledge.
This was not without reason. Over a period of about 20 years from the 1980s, a series of crises ripped through the financial systems of South America, Asia and Russia. These events forced emerging market states to tighten their belts, a practice that naturally filtered through to the company level.
At the same time, the regions underwent major political and technological upheaval, which included the dissolution of the Communist bloc and the opening up of previously inaccessible markets such as China.
Yet while these initiatives were generally applauded, investors were less forgiving. There was little faith in the corporate governance structures in these countries following the range of crises. This was the case until the Western debt crisis in 2007, which highlighted just how financially sophisticated emerging markets had quietly become behind the scenes, while exposing severe structural failures in the West.
This sparked a flurry of EM bond fund launches as asset managers looked to exploit the phenomenon. Almost all of these focused on sovereign debt, where hefty state surpluses made the opportunity very visible, with corporate credit seen as a bit too niche.
Over the past five years, these sovereign debt funds have not let investors down and as trust grows, the opportunity in their corporate relatives has become increasingly apparent. In the immediate aftermath of the credit crisis, emerging market companies fought to stand on their feet in the turbulence and five years on, their efforts are starting to be appreciated.
Threadneedle emerging market debt fund manager Zara Kazaryan explains: ‘Emerging market companies learned some painful lessons in 2008-09, and in general currently possess the financial flexibility to meet forthcoming debt maturities, continue to diversify their business away from significant geographical concentration, and hedge the existing debt stock.’
Meanwhile, Aberdeen Asset Management highlights how the credit crisis demonstrated the resilience of emerging market companies. ‘2009 was the year of particularly high default rates. Even then, the default rate for high-yield EM corporate bonds was 6.1%, of which approximately three-quarters came from the Kazakhstan bank sector,’ Aberdeen says.
‘This compares to 9.5% for global corporate bonds and 11.2% for US high-yield corporate bonds. Outside of the Kazakhstan banking sector, 2009 default rates were very low in emerging market corporate bonds.’
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